(Adds reaction from head of Puerto Rico's Government Development Bank)

NEW YORK, May 28 (Reuters) - A consortium of York Capital Management, NRG Energy Inc and ITC Holdings Corp have proposed investing as much as $3.5 billion in Puerto Rico's electrical infrastructure, a source familiar with the consortium said on Thursday.

The island's electricity is supplied by struggling electric power authority PREPA, which has debt of around $9 billion and is due to present creditors with a business plan on Monday.

The proposed investment would be for a total of $2.5 billion to $3.5 billion and would be subject to due diligence, the source said. The investment would be to modernize the electrical system, the source said.

PREPA, which provides electricity to Puerto Rico's roughly 3.5 million residents, charges consumers around double the average customers pay in the U.S. mainland. It is under pressure to convert from burning oil to generate power to generally cheaper and cleaner natural gas.

The proposal was earlier reported by Caribbean Business and does not include an ad hoc group of PREPA's bondholders, the report said.

Caribbean Business said the proposed investment would save money by substituting existing units with small natural gas-fired turbine units.

"At this stage of the process, we are not entertaining any particular proposal regarding our modernization plans," said Melba Acosta, head of Puerto Rico's Government Development Bank.

"We are focused on discussing our plan to transform PREPA and reach a fair agreement with bondholders."

Acosta said that she was aware that several groups had expressed interest in modernizing PREPA.

"At the proper time, all interested parties will be able to participate in an open competitive bidding process," she said.

PREPA's ad hoc group of creditors, including OppenheimerFunds and Franklin Templeton, in March offered $2 billion to finance a turnaround at PREPA, $1.2 billion of which would fund a new natural gas facility.

"Our interests are aligned - our goal is the improvement of PREPA and therefore we welcome the introduction of any creative solutions that will benefit all PREPA stakeholders," said Stephen Spencer, a managing director at Houlihan Lokey and financial adviser to the ad hoc PREPA Bondholders.